Doing your taxes in the middle of a divorce can get complicated, with all the deductions and credits you need to know. As a couple splits up, they have to figure out who will own which physical and financial assets, and their taxes may reflect this. Here’s an overview of what you’ll need to know to make the process a little easier:
Divide property and debt
If you live in one of the nine community property states, where all assets and liabilities are considered equally owned, you may want to consult a lawyer or legal aid service to guide you through the process. This is especially true if a pre- or post-nuptial agreement is involved, which can further complicate the tax picture. Although legal and other fees can get expensive, it may be best to have neutral third parties involved to clarify matters. Some related costs, such as tax advice, may be deductible expenses too.
Additionally, steps taken during a divorce, such as selling a home or divvying up retirement funds and debts, can affect tax obligations. There might also be a few loose ends tied to previous tax returns, such as overdue payments, interest and penalties on a joint filing. Keep in mind that until your divorce settlement is legally accepted by a court, you’re still married in the eyes of the Internal Revenue Service.
Know your filing status
How you can file your taxes depends on your legal status on the last day of the tax year. If a court hasn’t ruled, then you’re still legally married, so you have to file that way, either jointly or separately. If you’re divorced by Dec. 31, you can file as single or head of household, if you qualify. The latter filing status may hold more tax advantages.
Take alimony into account
Your divorce determines whether you or your spouse should receive alimony. This court-ordered financial support may be deductible from taxable income if you pay it. If you receive it, you have to report it as income. Legal, accountant or other fees associated with calculating alimony may be tax deductible.
If you have to pay the mortgage and taxes on a jointly owned home as part of a divorce agreement, you may treat half of the payments as alimony, and your ex must report the payments as income. Similarly, you may be able to claim half the interest and property taxes you pay as deductible expenses.
Factor in children
If your kids live with you for more than half of the year, you may be able to claim them as dependents and receive the exemptions that reduce your taxable income. Their other parent may claim the children as dependents with the ex’s written consent on IRS Form 8332.
As for the costs of child support — food, clothes and more — most of them aren’t deductible. If you receive child support payments, they don’t count as taxable income. But if your child is seriously ill and you pay the medical costs, those payments may be deductible even if you’re not the custodial parent and can’t claim the child as a dependent. Interest you pay on loans for your child’s schooling may also be deductible, but the child must be your dependent when you take out the loan.
These tips can help you sort out your taxes during and after divorce. Understanding the financial effects of shared property and liabilities as well as child custody and other issues will help make the filing process smoother.